Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38

This case concerned complex credit swap transactions involving Lehman Brothers entities and Australian investors. The Supreme Court examined whether contractual provisions altering security priorities upon insolvency violated the anti-deprivation rule. The Court upheld the validity of commercially sensible 'flip' clauses, establishing that bona fide commercial transactions entered in good faith do not infringe the anti-deprivation principle.

Facts

The case arose from the collapse of Lehman Brothers in September 2008. Under the Dante Programme, special purpose vehicles issued notes to investors (the Noteholders), using subscription moneys to purchase secure collateral. Lehman Brothers Special Financing Inc (LBSF) entered into credit default swap agreements with the issuers. The documentation provided that LBSF would have priority over the collateral (Swap Counterparty Priority) unless an Event of Default occurred where LBSF was the Defaulting Party, in which case Noteholder Priority would apply. When LBHI filed for Chapter 11 protection on 15 September 2008 and LBSF on 3 October 2008, these provisions were triggered, changing the priority from LBSF to the Noteholders.

Issues

Primary Issue

Whether the contractual provisions altering priority upon LBSF’s insolvency were invalid as contrary to the anti-deprivation rule, which prevents withdrawal of assets on bankruptcy to the detriment of creditors.

Secondary Issue

Whether the Event of Default occurred upon LBHI’s Chapter 11 filing (15 September 2008) or LBSF’s filing (3 October 2008), and whether this affected the application of the anti-deprivation rule.

Judgment

The Supreme Court unanimously dismissed the appeal, holding that the contractual provisions were valid and did not infringe the anti-deprivation rule.

Lord Collins’ Reasoning

Lord Collins delivered the principal judgment, conducting a comprehensive analysis of the anti-deprivation rule and its historical development. He distinguished between the anti-deprivation rule and the pari passu principle:

“The anti-deprivation rule is aimed at attempts to withdraw an asset on bankruptcy or liquidation or administration, thereby reducing the value of the insolvent estate to the detriment of creditors. The pari passu rule reflects the principle that statutory provisions for pro rata distribution may not be excluded by a contract which gives one creditor more than its proper share.”

Lord Collins emphasised that commercial sense and good faith are highly relevant factors:

“The policy behind the anti-deprivation rule is clear, that the parties cannot, on bankruptcy, deprive the bankrupt of property which would otherwise be available for creditors. It is possible to give that policy a common sense application which prevents its application to bona fide commercial transactions which do not have as their predominant purpose, or one of their main purposes, the deprivation of the property of one of the parties on bankruptcy.”

He concluded that this was a complex commercial transaction entered into in good faith, where the security was in substance provided by the Noteholders:

“The security was in commercial reality provided by the Noteholders to secure what was in substance their own liability, but subject to terms, including the provisions for Noteholder Priority and Swap Counterparty Priority, in a complex commercial transaction entered into in good faith. There has never been any suggestion that those provisions were deliberately intended to evade insolvency law.”

Lord Walker’s Concurrence

Lord Walker agreed with Lord Collins, adding observations about the significance of examining what the bankrupt contributed to the transaction:

“In this case the noteholders were, as a matter of substance, the only party who contributed real assets – in many cases the pension funds of hard-working Australian citizens. LBSF contributed only promises, and then proved unable to perform them.”

Lord Mance’s Analysis

Lord Mance provided a detailed separate judgment agreeing with the outcome but offering additional analysis. He emphasised that the court must make an objective assessment:

“In my opinion, the court has to make an objective assessment of the purpose and effect of the relevant transaction or provision in bankruptcy, when considering whether it amounts to an illegitimate evasion of the bankruptcy law or has a legitimate commercial basis in other considerations.”

Implications

This decision has significant implications for structured finance transactions and the use of ‘flip’ clauses:

• It confirms that the anti-deprivation rule remains valid after 200 years of authority but must be applied in a commercially sensitive manner
• Bona fide commercial transactions entered in good faith will generally be upheld
• The source of assets is a relevant, sometimes decisive, factor in determining validity
• Party autonomy in complex financial instruments is given considerable weight
• The distinction between determinable interests and defeasible interests remains relevant

The case provides important guidance for structuring security arrangements in sophisticated financial transactions, indicating that English law will respect legitimate commercial arrangements even where they alter priorities upon insolvency, provided they are not designed to evade insolvency legislation.

Verdict: Appeal dismissed. The Supreme Court unanimously held that the contractual provisions altering priority upon LBSF’s insolvency were valid and enforceable under English law and did not infringe the anti-deprivation rule.

Source: Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38